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THE DAY AHEAD: EToys won&#039t get a free ride from traditional retailers

Tech Industry

EToys Inc.'s (Nasdaq: ETYS) IPO will sizzle, but the long-term battle between the e-tailer and the bricks-and-mortar crowd will be far more interesting.

EToys, which priced its 8.2 million share initial public offering at $20, will begin trading Thursday with all the prerequisite hype surrounding big-time e-tailers. Many analysts are already comparing eToys to Amazon.com Inc. (Nasdaq: AMZN).



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There are similarities. eToys and Amazon both established an online foothold well before the traditional competition did. The traditional guys are always a step slower as they fret about cannibalization and other issues.

But eToys won't have the headstart that Amazon did. That's where things will get interesting. When Barnesandnoble.com goes public next week, it will be a bit player in terms of sales compared to Amazon. You can thank Amazon's head start for a lot of that.

Competition fierce

The traditional guys have apparently learned from Barnes & Noble's pain. EToys has to face not one main competitor, but two. The first competitor is Toys "R" Us (NYSE: TOY). EToys basically built its business model on one fact: Parents hate shopping at Toys "R" Us. Long lines and whiny kids are essentially a commercial for the convenience of online shopping.

Not surprisingly, eToys pitch is "We bring the toy store to you."

It took a while but Toys "R" Us is getting Net religion and spinning off its Web unit. You could discount Toys "R" Us' Web effort if it wasn't for the venture capital money Benchmark Capital is putting up. Benchmark also backed eBay. Toysrus.com will also be based on the West Coast, far away from Toys "R" Us' unhip Paramus, NJ headquarters.

Meanwhile, Consolidated Stores, the parent company of KBToys, is combining KBToys.com with BrainPlay.com, an online toy seller. Factor in competition from Wal-Mart Online, Toysmart.com and potentially Amazon and all the elements for razor-thin margins and fierce price competition are in place.

Through March 31, eToys has served 365,000 customers with 75,000 added in the quarter ending March 31.

Big Babycenter losses

Despite the long list of competitors, it's clear eToys sees Toys "R" Us as the main competition. In April, eToys bought Babycenter, which could be viewed as an online version of Babies "R" Us. Steven Tuen, director of research for IPO Value Monitor, said the Babycenter acquisition is good long term, but puts eToys in the content business.

"Babycenter reminds me a lot of iVillage," said Tuen. "It's less of a pure retailer than eToys, but will help a lot with baby registrations and other sales."

The Babycenter acquisition, expected to close in June, also brought in some hefty losses. Babycenter added nearly $5 million to eToys top line, but more than doubled eToys' losses for the year ending March 31 including Babycenter acquisition costs and share dilution.

EToys will also carry $180.7 million in goodwill from the Babycenter purchase amortized over five years. Forget about hopes of profitability.

Including Babycenter, eToys had a loss of $73 million on sales of $34.7 million for the year ending March 31. If you back out Babycenter, eToys reported a loss $28.5 million on sales of $29.9 million for the year. Like Amazon, eToys definitely knows how to lose money.

And eToys expects a lot more red ink. "We anticipate our losses will increase significantly from current levels," said the company in a regulatory filing. EToys said it will grow its brand, invest in distribution and infrastructure and expand product offerings -- all are Amazon-like endeavors.

Now all eToys needs is an Amazon-like market cap.

eToys tidbits

EToys doesn't need better online security, it needs better real-world security. For the quarter ending March 31, eToys said it lost $270,000, or 4 percent of its gross margins, because of theft in its distribution center.

To put that sum in context, that's 2,077 Sony Playstations at $130 a pop.

Forget the marketing and expansion plans, get some security guards already.

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